How can you use throughput costing to identify production bottlenecks?

1 What is a production bottleneck?

A production bottleneck is a stage in the production process that has the lowest capacity or efficiency, and therefore slows down the entire flow of output. For example, if you have a machine that can produce 100 units per hour, but it depends on another machine that can only produce 80 units per hour, then the second machine is the bottleneck. A bottleneck can reduce your throughput, which is the rate at which you can produce and sell your products, and lower your profit margin.

3 How can you improve your bottlenecks?

Once you have identified your bottlenecks, you can take steps to improve them and increase your throughput and profit. Options include increasing capacity or efficiency of the bottleneck machine or process, reducing the demand or workload, balancing the production flow, and prioritizing products with higher throughput and demand. You can upgrade, repair, or replace the bottleneck machine or process; eliminate waste, rework, or defects; outsource tasks to external suppliers; adjust output or input of other machines or processes; use buffers or inventory to smooth out fluctuations; and allocate more resources and time to products with higher throughput ratio and demand.

4 What are the benefits of throughput costing and bottleneck improvement?

Throughput costing and bottleneck improvement can offer several advantages to your business, such as increasing your profit margin by maximizing the revenue generated from each unit of direct material cost. It can also enhance your competitive advantage by providing higher quality, faster delivery, and lower prices to customers. Moreover, it can improve operational efficiency by eliminating waste, rework, and defects while optimizing resource utilization. Additionally, it can help align your product mix and pricing strategy with market demand and customer preferences. And lastly, it can support strategic decision making by providing relevant and timely information on product profitability and performance.

5 What are the challenges of throughput costing and bottleneck improvement?

Throughput costing and bottleneck improvement can be challenging, as they may overlook fixed costs and overheads that are still relevant for long-term planning and budgeting, or ignore non-financial factors such as customer satisfaction. Additionally, there may be resistance from employees, suppliers, or customers who have different incentives. It's also possible to encounter new or unexpected bottlenecks as you change your production process, product mix, or market conditions, making it necessary to constantly monitor and adjust your throughput costing and bottleneck improvement efforts.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?